Fundsmith founder says France digging itself deeper into a hole
Terry Smith, chief executive of broker dealer Tullett Prebon and founder of fund manager Fundsmith, says investors should not consider France in the same “euro group” as Germany, since its economic fundamentals are closer to the indebted southern European states.
In an interview on the flagship Today programme on the BBC, Smith (pictured), one of the highest profile asset managers in London, said: “It is amazing how France is viewed as being alongside Germany in terms of economic standing, dispensing advice and judgement to the peripheral countries in the eurozone crisis when in fact it has far more in common with those countries than is does with Germany.”
He pointed out that France’s public debt was 79% of GDP at the end of 2011 and is expected to rise to 84% this year and 86% next year. The French public sector accounts for 56% of GDP – 10 points higher than Germany – and tax revenues are 51%.
Additionally, France has run a current account deficit for 10 years, which is set to reach €100bn by the end of the year. Its export performance is worsening: its share of eurozone exports has fallen from 17% a year ago to just 13%. It now exports less than the Netherlands, which has 16 million people compared with 63 million in France.
Unemployment is over 10% in France compared with under 7% in Germany, despite it being “almost impossible” to make anyone redundant, Smith charged. He said the country is increasingly uncompetitive, with an average hourly wage rate of €34 compared with €30 in Germany and €20 in Spain.
Surveys of competitiveness continually show France in a poor position. The World Economic Forum puts France in 21st position versus Germany in 6th place; and the Institute of Management Development has France 29th well behind Austria, Belgium, Denmark, Finland, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden, and the UK.
“In other words it is closer to the peripheral countries in this respect than the core of the eurozone,” he said.
President Francois Hollande’s actions are “so far are precisely the opposite of that sage advice about what to do if you find yourself in a hole: he has raised taxes to 75% on earnings over €1m at a time when London is already the sixth largest city for French population, and reversed an earlier planned increase in the retirement age from 60 to 62,” Smith continued.
He quoted a French minister as saying that the government was aiming to make redundancies “so costly it’s not worth it”, which will only further stall structural economic reform and labour mobility.
“France already lost its triple A status on its debts in January so we cannot say we weren’t warned, but this seems to have been forgotten,” he added.
Even the IMF, which has been dominated by top French appointments for more than 30 years, has warned that the economy needs ‘a comprehensive programme of structural reforms’ and deeper spending cuts rather than tax increases.
Terry commented: “Sooner or later the market is going to figure out that France is in a mess and getting worse with dire consequences. French pride makes it unthinkable that it will leave the euro but staying in will cripple it given the lethal combination of an inability to devalue its currency or to achieve competitiveness through deflation of wage rates.”